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May 17, 2012

How to Buy Facebook Without All the Risk

Advisors plan to snap up ETFs that give clients exposure to the hot social media IPO without too much volatility

Mark Zuckerberg, Facebook founder. (Photo: AP)

As demand skyrockets for Facebook's (FB) initial public offering of stock on Friday, advisors are planning to snap up exchange-traded funds that can give their clients exposure to the hot new social media IPO without exposing them to the stock's expected initial volatility.

The two ETFs that will offer exposure to Facebook within the first trading week of its launch are the Global X Social Media Index ETF (SOCL) and the First Trust US IPO Index Fund (FPX), according to Scott Freeze, president of Street One Financial, a broker-dealer that works with ETF issuers, money managers and registered investment advisors (RIAs) of $13 billion to $20 billion in assets to identify ETFs that provide the desired mix of manager objectives, fees and liquidity. Facebook closed its first day of trading on Friday, up only 23 cents, at $38.23.

“We have seen a huge amount of interest,” Global X Funds CEO Bruno del Ama told AdvisorOne in an interview on Wednesday. “We brought the fund to market in November 2011, and demand was slow when it first came to market, but following the announcement of the Facebook IPO it really took off, and we’ve had many inquiries from the financial advisor community. SOCL is an open-end ETF. Anybody with a brokerage account can buy it, and it trades like any other stock.”

Facebook said in a filing with the Securities and Exchange Commission that it is raising the number of shares for sale to 421 million, 25% more than it had previously planned to offer. At $38 a share, the maximum price Facebook says it plans to seek, the social networking giant’s offering would raise nearly $16 billion, making it one of the largest IPOs in history.

“Last I heard,” Freeze said on Thursday, “Facebook is definitively priced tonight, and it will start trading tomorrow at $34 to $38 a share, and that’s finalized. With the oversubscription, $45 would be the maximum.”

Freeze identified SOCL, which uses the Solactive Social Networks Index as its benchmark, as the most aggressive of the ETFs expected to gain exposure to Facebook. The Solactive index rule is for a five-day, post-listing period before a stock can be added to the ETF.

Del Ama said SOCL will buy Facebook shares after the close on the fifth day of trading, May 24, and that Global X expects the ETF should have a 10% weighting among its top holdings.

Freeze predicted that Facebook will be SOCL’s top holding after the launch. As of May 16, the fund’s top holding is LinkedIn. SOCL currently trades about 30,000 shares a day on average, and recently has been trading at six figures a day, he noted, saying the increase “is probably investors getting into the ETF in front of the Facebook addition.”

As for the First Trust US IPO Index Fund, FPX has seen increased activity similar to SOCL’s. Until recently, FPX averaged only 6,000 shares a day, and now it has started seeing close to 20,000 shares a day, most likely due to the Facebook addition, Freeze said.

First Trust should have a 10% weighting in Facebook on the seventh day after trading, he said, noting that the fund is market-cap weighted and has a ceiling of 10% for any one issue.

Freeeze listed other ETFs that will eventually offer exposure to Facebook as follows:

UBS E-TRACS Next Gen Internet ETN (EIPO), which should add Facebook on the first Tuesday in June; First Trust Dow Jones Internet Index (FDN); PowerShares (QQQ); Technology Select Sector SPDR (XLK); and PowerShares NASDAQ Internet (PNQI), which shouldn't see Facebook for “quite a while,” according to Freeze, who couldn’t specify a timeframe.

“QQQ is the NASDAQ 100 Index, so Facebook would have to be added to the index itself before it could be added to the ETF,” he said.

Google made it into the S&P 500 Index after 19 months, del Ama noted. “The only indices that would incorporate Facebook sooner would be either those that are focused on IPOs or sector-based indices such as SOCL.”

Asked about the risk involved in a social media IPO launch, del Ama said many advisors have expressed concern, and he said that in the first few days, Facebook stock will be a speculators' market, not an investors' market.

“By the fifth day of trading, most of the volatility will play out as speculators exit,” del Ama said. “This is when financial advisors can look for sensible products that will offer access to Facebook. Advisors’ clients are asking about the IPO as well as their children and grandchildren who have Facebook accounts. They’re curious about the company, but it’s true that advisors are risk-averse. They see that SOCL is a great way to diversify across the social media spectrum, and they also like its valuation.”

General Motors this week announced that it plans to stop advertising on Facebook because it can’t link car sales back to site users. Del Ama said that GM’s decision to stop advertising on Facebook is a negative in the short term, but the fact that Facebook is selling 25% more shares indicates a positive trend for the social media sector.

“Short term it’s discouraging, but longer term I don’t think it changes the value proposition of Facebook,” he said.

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